Sandy Flood Insurance Claim Appraisals with Overhead & Profit Claims
Flood insurance claims under the National Flood Program are unique. As implied in yesterday's post, Appraisal in Flood Claims, those closely involved with controversies regarding appraisals under the National Flood Program should not only read cases construing the flood policy, they should also read briefs filed by the attorneys for National Flood to anticipate future arguments and issues. This is very important to properly representing Hurricane Sandy insurance claimants.
One flood claim appraisal issue involved an award of general contactor over and profit with a curious result.1 Generally, including contractor overhead and profit is a factual issue,not a legal issue, when a general contractor's involvement is expected to repair or replace damage to a structure. This has been discussed in Overhead and Profit Should Be Included in Actual Cash Value Payment to Policyholder and When Is a Policyholder Entitled to Overhead and Profit? I have written a paper on the topic: Withholding Overhead and Profit is Wrong if Insurance Companies are Trying to Act Right.
However, in Dwyer, the court held as follows after an umpire awarded overhead and profit:
Fidelity contested the umpire's addition of overhead and profit but accepted the umpire's damage figure, which was approximately $1,500 more than Fidelity's original estimate. Overhead and profit is a pass-through cost intended to reimburse homeowners for the expense of using a general contractor. Since the Dwyers sold their home unrepaired, they never incurred and will never incur the cost of a general contractor. They are not entitled to overhead and profit. (emphasis added)
I suggest the decision is wrong for a number of reasons. The Dwyers sold the building in a damaged condition, so the eventual purchaser would theoretically deduct the cost of repairs, including the cost for overhead and profit, from the price they were willing to pay for the building. Even if the Dwyers did not repair the building, the reduced amount they could get for the building shows the financial loss they incurred. Moreover, the contract contemplates paying overhead and profit so long as a general contractor would be expected to be retained for repair. The policyholders could have rebuilt the structure in any form or design they wanted, as long as it complied with building codes. Losses are first adjusted on a theoretical basis. This is a basic principal of claims adjustment.
I know many claims managers for the flood catastrophe firms and the National Flood Program read this blog. Maybe they will have a change of heart on this issue. Their customers are being ripped off otherwise--even if insurers were able to use their very capable attorneys to successfully argue out of rightful coverage.
Who are those capable attorneys? Those with the Nielsen Law Firm and Gerald J.Nielsen. Reading just one of their briefs in this matter provides an idea of what attorneys representing National Flood think should happen in an appraisal:
The first use of the word “agree” above necessarily contemplates direct communications and conversation between the insured and the insurer. The next use of the word “agree' contemplates conversations between the two appraisers to “choose an umpire.” The ensuing uses of the words agreement, agreed, and agree all indicate that the two appraisers are to communicate to achieve agreement, if they are unable to do so, they are to try to achieve that agreement with the umpire. Again, how can agreement be achieved successfully, or accurately, without direct communication?
In addition to the objective of trying to achieve agreement to accomplish the purposes of the appraisal clause, direct communication brings with it the additional benefit of increasing the likelihood that the appraisal award will be accurate. And, because we are using federal funds to pay these claims, isn't accuracy an important consideration? Why would the courts build in to the system, impediments to communication, which would serve only to increase inaccuracy, and increase the failure rate of appraisal?2
The brief further explains where the National Flood adjusters are taught to wrongfully deduct overhead and profit from payment:
Overhead and profit is found in § 7(h) of the NFIP Adjuster Claims Manual (1/1/04 Ed.), which provides as follows:
VII. Basic Adjustment Issues,
H. OVERHEAD AND PROFIT
The overhead and profit percentage must be applied to the depreciation total and reflected in the ACV loss figure. Overhead and profit is not applied to the following items:
1. Carpeting
2. Insured's own labor
3. Outside service charges such as plumber, electrician, or appliance service calls
4. Repairs made by the insured (However, an allowance can be made for the insured's time and expense in purchasing materials, not to exceed 10 percent.)
Overhead and profit is warranted only if a general contractor has been hired to make repairs. The adjuster must document the general contractor's involvement. The NFIP Servicing Agent or the WYO company has the option of withholding the overhead and profit until the repairs are completed or until a contract is signed.
The directive is less egregious than some in claims manuals belonging to other insurers. Indeed, National Flood claims managers recognize overhead and profit is part of the calculation for actual cash value payments.
Yet the bolded language in the directive is misleading and wrong. The directive is overly broad in application. It should have read: Overhead and profit is a warranted construction expense if a general contractor should be expected or required to make the repairs.
Obviously, every public adjuster and appraiser working on National Flood Insurance claims should have a copy of the current claims manual. Those wondering how National Flood views its policies should read Nielsen's briefs.
Since we are talking about Flood:
1 Dwyer v. Fid. Nat. Prop. And Cas. Ins. Co., 428 F. App'x 270 (5th Cir. 2011).
2 Dwyer v. Fid. Nat. Prop. & Cas. Ins. Co., No. 10-30708, 2010 WL 7124854, *32 (5th Cir).
What is not understood; Actual Cash Value is payment for what was there, not payment for repairs. If the structure was built by a contractor with all building code requirements, etc., then part of the cost of the damaged building components originally included Overhead and Profit.
Actual Cash Value has nothing to do with incurring new costs; the costs were incurred when the structure was originally built; and therefore Overhead and Profit is owed as part of ACV.
John,
I do not understand your point. Do you agree the decision is wrong or right?
Actual Cash Value has a lot to do with new costs and Replacement Cost. Most indicate that that a measure of actual cash value can include Replacement Cost less the actual depreciation of an item. So, I do not agree with your statment that "Actual Cash Value has nothing to do with incurring new costs" because it is a bit overbroad.
I do agree that Over and Profit should be included in an actual cash value figure if it is expected to be incurred in the Replacement or Repair Cost, but many insurers have not agreed and that is the reason for cases on the topic.
Dear Chip,
This article made me feel better. I'm currently a Sandy claim in south Jersey. I have read through the NFIP/SFIP to do battle, its not easy. I find it unconscionable that even though I'm a primary resident, owner occupied duplex I don't qualify for RCV because of my 2 family status. Yet an under insured individual even if its their 2nd home may qualify for a proportional payment method--they get RCV.
This whole program is a disgrace. Wait till they fully run our healthcare.
Thanks for the info!!
Little people like me need it!
Sean,
I can understand your frustration.
The one thing I would like to point out, however, is that without this program, you would not have any insurance at all. Historically, the private marketplace refused to write the coverage because of capacity problems.
O&P should be considered as an "incurred" cost and does not normally fall within the purvey of an A.C.V. settlement. A.C.V. is meant as indemnity to restore to pre loss condition which has an inherent depreciation factor if the property is not new. When "replacement" is effected and O&P incurred if a general contractor is utilized rarely will a carrier dispute reasonable costs. The issue lies in whether or not the intention was to settle on a RC basis without it having taken place which is counter to the original principle of indemnity before the advent of a replacement cost component in the policy.
Veteran,
I have a lot of respect for your views and appreciate you commenting.
Please read my paper noted in the post and the other posts. I disagree with you.
Note the part that says:
"the Department dispensed with the common argument that contractor overhead and profit, as well as sales tax on building materials, should be excluded from Actual Cash Value settlements because the insured has not incurred these expenses as illogical:
'Using this logic, an insured who opts not to repair or replace damaged property would not incur any of the expenses necessary to repair or replace the damaged property, including the costs of building materials, and would collect nothing under an actual cash value loss settlement. This result would be contrary to the purposes of the subject insurance policy."
You do not take out the overhead and profit of a manufacturer or supplier of personal property when making an actual cash value calculation. There is no logical reason to make a different rule for property that is a structure if the cost is anticipated.
I read with interest the arguments made in your briefs.
Forty years ago when I started adjusting there was no replacement cost component to a policy everything was paid at ACV and no O&P allotted till repairs were completed or a signed agreement with a general contractor entered into.
Those same forty years also revealed that most insureds left to their own devices with a cash settlement rarely complete the repairs described on the estimate of damages.I'm sure that it is the intent of all insurance professionals to see the insured benefit from every facet of the policy.
The difference of opinion lies in how that is achieved.
I didn't know there is a thing such as this. Anyway, thanks for sharing all these must-read blog posts!